Mutual Fund Basics Have you been considering investing money in mutual funds but you don't know where to start? With several thousand mutual funds to choose from it can be a daunting task. Do not let this discourage you from investing in mutual funds. Over time, the stock market and mutual funds have proven to be a good long term investment. The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders. First, you should know exactly what a mutual fund is. A mutual fund is a professionally managed portfolio of investments such as stocks and bonds. When you buy a mutual fund share you own a little piece of every investment in the mutual fund's portfolio If the value of these investments go up, the value of your mutual fund's share price will go up. The opposite holds true as well. If the investments go down, the mutual fund's price per share or NAV (Net Asset Value) will go down. The type of investments each mutual fund can invest in is specifically stated in the fund's prospectus. For example, an equity fund will usually invest in stocks while a bond fund will invest in bonds. Of course, there are mixed funds that can invest in both stocks and bonds. The type of mutual fund that is best for you depends on factors such as your age, risk tolerance, and investment goals. A mutual fund can receive dividends from the stocks that it owns. Dividends are shares of corporate profits paid to the stockholders of public companies. The fund might have money in the bank that earns interest, or it might receive interest payments from bonds that it owns. These are all sources of income for the fund. Mutual funds are required to hand out (or "distribute") this income to shareholders. Usually they do this twice a year, in a move that's called an income distribution. At the end of the year, a fund makes another kind of distribution, this time from the profits they might make by selling stocks or bonds that have gone up in price. These profits are known as capital gains, and the act of passing them out is called a capital gains distribution. The other big advantage of a mutual fund is professional management. If you are unsure of what investments to buy yourself or simply don't have the time to do the research it is very helpful to have a professional do that for you. Of course, this professional service is not free. Each year a management fee is charged to the mutual fund. The percentage of the fee charged can vary from fund to fund so make sure the fee charged is "in line" with other mutual funds.
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